UK looks to streamline national security and investment rules

The UK government confirmed it will make a series of refinements to the National Security and Investment Act 2021 (NSIA) regime, which will put investment in water companies under increased scrutiny, and lift mandatory oversight on some AI systems.

The move comes following a 12-week consultation with trade bodies, legal experts and industry stakeholders on proposed amendments to the Notifiable Acquisition Regulations (Regulations) – which set out the scope of mandatory notification requirements under the NSIA – and looks to streamline the notification process to cut unnecessary regulatory burdens and increase scrutiny of high-risk transactions.

Under the proposed changes to the Regulations, the number of sensitive sectors of the economy that can be subject to mandatory review under the NSIA will increase from 17 to 19, with the addition of a new water sector and the creation of standalone categories for semiconductors and critical minerals. Inclusion of the water sector comes amid concerns over the resilience of key national infrastructure, particularly in light of a projected £100 billion investment in the sector by 2030.

With less than 5% of the 1,143 notifications generated under the NSIA regime in 2024-25 called in for further assessment, Giles Warrington, a merger control expert with Pinsent Masons, said the reforms would help increase efficiency and further cut unnecessary filings in sectors affected by the proposed reforms.

"Overall, the proposed reforms are a pragmatic evolution of the regime and aim to provide more certainty for businesses in understanding when and how NSIA notification requirements may apply to their transaction,” he explained.

“It will be interesting to see how the government approaches reviews of transactions in the water sector under the updated NSIA rules. In particular, whether it will confine its assessment to traditional national security considerations - such as the potential for a hostile acquirer - or whether it will take a broader view of ownership structures, including factors such as financial resilience and the long‑term stewardship of essential infrastructure.”

Alongside the new legislation covering major water and sewerage providers, the rules will see semiconductors and critical minerals - previously grouped together - now be treated as distinct sectors to ensure the NSIA keeps pace with technology changes.

The semiconductor category will cover advanced packaging, chip design and related technologies, while the critical minerals category will align with the UK Critical Minerals Strategy, covering 34 minerals classed as essential for defence and scientific purposes.

The artificial intelligence category will also be revised to exclude low-risk activities, with off-the-shelf AI systems used for routine business functions no longer triggering mandatory notification and a focus instead being put on entities that develop or significantly modify AI systems - particularly in safety testing, disinformation risk evaluation or research into advanced capabilities.

Other sectors, including advanced materials, communications, data infrastructure, energy, and critical suppliers to government and emergency services, and synthetic biology, will be covered by the amendments to improve legal certainty and reduce ambiguity.

“The NSIA regime is maturing and the government’s consultation response and proposed refinements demonstrate a commitment to balancing national security with economic growth,” said Tadeusz Gielas, a competition law expert with Pinsent Masons.

“The exclusion of routine AI use and the provision of clearer guidance will help businesses navigate the regime more effectively, while the continued focus on critical technologies and infrastructure underscores the government’s broader economic security agenda," he said.

Paul Williams, a competition law expert with Pinsent Masons, said the inclusion of the water and critical minerals sectors marked a significant expansion of the regime’s scope, but that there is welcome clarification elsewhere.

“While this change introduces new compliance requirements for transactions in certain sensitive industries, the narrowing or clarification of definitions in other sectors will hopefully reduce the overall volume of mandatory filings and provide greater certainty for dealmakers,” he said.

“It is helpful that the AI sector will exclude companies using off the shelf AI products, and the updated thresholds for energy transactions should streamline the number of transactions which fall into the regime."

Williams added that the forthcoming changes are limited to sector definitions under the regulations and do not involve wider aspects of the NSIA regime, such as introducing exemptions for insolvency transactions and internal reorganisations. These kinds of transactions are rarely associated with national security concerns and such exemptions – if introduced in the future – could help to further reduce regulatory burdens for businesses.

 “Certain M&A deals undergoing review under the NSIA regime may also face parallel scrutiny from a competition law perspective under the UK’s merger control regime which is enforced by the Competition and Markets Authority,” said Gielas.

“The UK government is also considering reforms to merger control rules, as part of its wider focus on driving economic growth and attracting investment in the UK.”

Reforms to the NSIA regime are expected to come into force later in 2026, following the introduction of secondary legislation.